Why Reliance's Strategy To Enter And Dominate The FMCG Market May Pose Significant Challenge To Established Players

In the company’s sixty-sixth Annual General Meeting held on Monday (29 August), Isha Ambani, the head of Reliance’s retail arm, highlighted the company’s intention to enter the FMCG segment.

The new move would place it in direct competition with established players like Hindustan Unilever, Procter and Gamble, Marico, Emami, Godrej Consumer Products and others.

For established players struggling with low demand, stagnant volume growth, and margin pressure, the entry of a large player like Reliance spells trouble.

Why is Reliance Stepping into General Trade?

Reliance runs Reliance Retail, India’s largest retail company, with an extensive presence in both online and offline channels.

On the physical front, the company operates 15,000 stores, of which 2,500 were opened up in FY22. Its stores include retail outfits like Reliance Fresh, Freshpik, Reliance Digital, Marks and Spencer (India), 7-Eleven (India) etc.

On the e-commerce side, it runs grocery platforms like Milkbasket and Jiomart. So far, Reliance has been selling its private label FMCG brands in its own stores, which is a modern trade channel.

However, now it is looking to sell its FMCG products through the general trade channel. The general trade channel includes local kiranas and shops that cater to local markets.

Despite the growing heft of e-commerce and modern trade, general trade still accounts for around 75-80 per cent of FMCG goods sales in India, making it necessary for FMCG players to use the general trade channel for growth.

Even “D2C” or direct-to-customer players who once focused solely on online distribution had to step into offline distribution to ramp up their sales.

Reliance’s moves indicated its plan to enter the general trade category much earlier than the formal announcement. In 2021, Reliance had come out with Puric Instasafe, a brand of hygiene and disinfectant products.

In May 2022, it was reportedly in talks with local brands that it was interested in building a portfolio of locally popular brands consisting of personal care, home care and food products.

The portfolio is expected to consist of around 50-60 FMCG brands, which makes it comparable to HUL’s portfolio of 50-plus brands. However, Reliance’s new brands are unlikely to have similar brand power as HUL’s brands.

In the FMCG business, brand power allows players to acquire some degree of pricing power, allowing them to have relatively better margins than other industries.

The FMCG arm is aiming to meet a target of Rs 50,000 crores in revenues in 5 years – almost equal to the revenues earned by Hindustan Unilever in FY22.

The aggressive growth target would likely be achieved by using Reliance’s own B2B e-commerce platform and aggressive margins offered to stockists.

Reliance’s JioMart has procurement services for B2B players like small shops. Kirana stores can buy goods at significant discounts from the Reliance Jiomart platform and re-sell them at the MRP, increasing their margins.

So far, kiranas have been dependent on company-appointed distributors for sales, but now, platforms like Reliance JioMart and Udaan are eliminating the middleman.

The margins offered by Reliance and Udaan’s B2B platforms are much higher than the margins offered by distributors. Reliance Retail already has 20 lakh merchant partners onboard and plans to onboard another 80 lakhs over the next five years, and take the total count to 1 crore.

Reliance is likely to use JioMart’s B2B platform to push its new brands into the market. But, its direct reach into kiranas is still limited, given the vast retail footprint of India, making it necessary for the company to appoint distributors as well.

According to reports, it is already persuading super-stockists to stock its FMCG products by offering them almost double the margins of other FMCG players.

The strategy of offering heavy discounts to competitors appears to be similar to the underpricing strategy used by Reliance when it launched Jio’s telecom services.

Interestingly, the foray into FMCG products might put it into direct competition with the Adani Group, which owns Adani Wilmar – an FMCG food products company with more than Rs 50,000 crores in sales as well.

Though the two business houses worked in their traditional domains with a little overlap for years, they are now entering areas where they would have to compete with each other.

RIL and the Adani Group are planning to enter similar lines of business such as green energy, sports, petrochemicals, media, telecom, and digital media, among others.

Adani-Wilmar has acquired the rights for rice brands like “Kohinoor”, “Charminar”, and “Trophy”, in order to grow its FMCG footprint.

All FMCG players are already witnessing stagnant volume growth and significant margin pressure, as the double-whammy of Covid and high inflation has lowered consumption spending, especially in rural areas.

Several FMCG companies are dependent on Reliance for their modern trade channel sales, e-commerce sales on JioMart, and a part of their distribution on the general trade side. Its experience with its private label brands has already given it experience on the FMCG side.

In case Reliance decides to give greater shelf space to its own brands on the B2C and B2B side, FMCG brands could see their sales growth slow down.

Reliance owns both – the brand and the distribution channels, possibly giving it an advantage over others.

But while existing players struggle with increasing competition, consumers and Kirana store owners might be the biggest beneficiaries of the increasing competition in the Indian retail sector.

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